Korean Won Nears 1,400 as Dollar Pressure Returns
The won has lost nearly 50 won against the dollar in less than two weeks as renewed US rate-hike expectations and foreign stock selling reverse its recent gains, though analysts say Korea’s external surplus should limit the slide.
South Korea’s won moved back toward the psychologically important 1,400-per-dollar level on Monday, rapidly reversing gains made earlier this month as a stronger US dollar and foreign selling of Korean equities renewed pressure on the currency.
The won traded around 1,385 per dollar at 2:30 p.m. after weakening beyond 1,388 earlier in the session. It had strengthened to 1,336.1 on Sept. 9, meaning it lost nearly 50 won against the dollar in less than two weeks.
The reversal followed a 25-basis-point interest-rate increase by the US Federal Reserve last week. The central bank also indicated that additional tightening remained possible, pushing US Treasury yields and the dollar higher. The shift has encouraged risk aversion and made dollar assets more attractive, adding to pressure on emerging-market currencies.
Foreign-exchange supply conditions inside Korea have also become less supportive. The won’s advance in July and August coincided with large current-account and trade surpluses, reduced foreign selling of Korean shares and comparatively restrained overseas investment by Korean investors. Dollar inflows related to SK hynix’s American depositary receipt program provided an additional boost during that period.
With those inflows fading, the currency’s direction is expected to depend more heavily on foreign investors’ Korean stock transactions and Korean investors’ purchases of overseas assets. Both sustained foreign equity sales and increased investment in US shares create additional demand for dollars.
Analysts said a move above 1,400 would not necessarily amount to a new currency crisis. Korea’s current-account surplus and dollar sales by exporters, particularly semiconductor companies, could cushion further depreciation. One forecast placed the exchange rate near 1,380 over the next three months, within a broad range of 1,340 to 1,420.
Oil prices remain a significant risk because South Korea imports most of its energy. Higher crude prices increase importers’ need for dollars and can reinforce expectations of tighter US monetary policy by keeping inflation elevated. A sharp decline in semiconductor prices could also weaken Korea’s current-account position and remove an important support for the won.
The exchange rate could move beyond 1,420 if oil rises above $120 a barrel or if falling chip prices threaten the external surplus, analysts said. Even so, the current range remains less alarming than the levels above 1,500 seen earlier this year. At present levels, the effects on domestic inflation, interest rates and the wider economy are expected to remain limited.